Decentralization to a firm is the ability of that firm to involve the relevant parties to its day to day activities while the efficiency of that firm is its ability to use the available resources to generate the returns anticipated and also to meet its short and long-term obligations. For the best decision making in an enterprise, all the stakeholders must be considered during the decision-making process, and this is the decentralization of decisions, and this leads to the arrival of strategic decisions which therefore brings about efficiency. Despite the fact that the CEOs can have more knowledge on a firms activities this cannot be compared with if they had some other minds with different ideas on the firm put together, thus creating population perspective and resource dependence (Ulrich & Barney,1984).
Let's take the case of Terex Corporation which is a global company delivering lifting and processing equipment's worldwide. Before the appointment of Ron De Foe as the Chief Executive Officer in 1996, the company was facing an economic recession which was a great threat to it. As the CEO, he encouraged his managers to run the company ” they had been given”, and this was a significant sentence that prompted decentralization in the company and branded Ron De Foe, a great icon of propelling decentralization management. The managers having been given the mandate to run the enterprise along with the CEO, the company started to flourish recording revenues of $6.4 billion in 2005 with over 1500 employees worldwide and corporate headquarter staff of 66 people.
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Along with Terex; Honey Well, the bank of Montreal, Toyota and Google are just but a few firms that have adopted the decentralized form of management and even decision making and have recorded a significant improvement in its efficiency.
In addition to improved efficiency at revenue generation; effective use of local language, conservation of management and motivation of local managers are the advantages of decentralization. These also encourage credit decentralization increasing credit discipline (Dewatripont & Maskin, 1995).
References
Stein, J. C. (2002). Information production and capital allocation: Decentralized versus hierarchical firms. The journal of finance, 57(5), 1891-1921.
Dewatripont, M., & Maskin, E. (1995). Credit and efficiency in centralized and decentralized economies. The Review of Economic Studies, 62(4), 541-555.
Ulrich, D., & Barney, J. B. (1984). Perspectives in organizations: resource dependence, efficiency, and population. Academy of Management Review, 9(3), 471-481.
